China the manipulator?

When Donald Trump raged against China on the campaign trail, he made one very specific threat, over and over: He promised to officially label China a currency manipulator. In fact, he promised he’d do it on his first day in office.

As plenty of observers have noted, 58 days have come and gone, and nobody has labeled China a manipulator of anything. Treasury Secretary Steven Mnuchin even backed off Trump’s promise late last month, saying that Treasury was going “through its process” of looking at currency manipulation.

But if Trump actually decided to do it, could he? And more importantly, would it even matter?

For all his theatrical China-bashing, Trump is hardly alone in bringing up the currency question. Mitt Romney made the same threat in 2012. Barack Obama supported legislation to punish China for its currency manipulation when he ran for president in 2008. Obama never did it, though, and most experts expected that Romney would have broken his promise as well.

As that record suggests, it’s a lot more popular to engage in a little empty China-bashing than to go through the bureaucratic process of officially declaring it a currency manipulator. And a look at the laws suggests that it’s probably just about as effective.

China really has manipulated its currency in the past, most experts agree, buying foreign assets—especially Treasury bonds—to depress the value of the yuan. This keeps the value of the yuan low and lets China export lots of cheap goods to the West. Andeconomists have found that such manipulation has caused significant pain to U.S. manufacturing, among other industries.

But the last time China was officially labeled a currency manipulator by the U.S. was 1994. In fact, that was the last time Treasury designated any country as a currency manipulator. Why? Treasury uses a precise definition for currency manipulation, one written with a great deal of leeway to let the U.S. avoid labeling a country a currency manipulator, even if economists widely believe otherwise. Every six months, Treasury issues a report outlining the exchange-rate practices of the U.S.’s major trading partners, looking at measures such aswhether the country has a “significant” trade surplus with the United States, or whether it has “engaged in persistent one-sided intervention in the foreign exchange market.” Each criterion sounds specific on the surface, but words like “significant” and “persistent” are left up to the Treasury Department to define. Treasury’s most recent report, a 43-page document released in October, found that no major U.S. trading partner met all of the metrics. (Five countries—Japan, South Korea, Taiwan, Germany and Switzerland—met two out of three.)

Treasury’s next report is set to be released by the end of April, and Trump could try to instruct the department to adjust the definition of currency manipulation so that China was labeled a manipulator. But it would be difficult to do so. Most analysts no longer believe that the yuan is undervalued; in fact, many believe it is actually overvalued now, and China has been taking steps to prop it up. Thus, in a sense, it’s still a manipulator—but not in the way that hurts U.S. trade.

What if Trump forced the issue?Even if Treasury reworked its definitions to label China a currency manipulator, there would be no immediate repercussions, other than requiring government officials to negotiate with China to adjust the value of its currency. After a year, Treasury could then retaliate against China in four ways: by blocking the U.S. Overseas Private Investment Corporation, a public development agency, from financing new programs in China; by preventing U.S. procurement dollars from going to Chinese companies; by appealing to the IMF for additional oversight over China’s currency policies; or by directing the U.S. Trade Representative to take into account Chinese currency policies when considering future trade deals. None of those actions are particularly threatening for China. (In fact, the U.S. already cut OPIC financing to Beijing after the Tiananmen Square massacre in 1989.)

That may be why the Trump administration is reportedly considering something that actually would be radical, and disrupt the process: According to the Wall Street Journal, it wants toallow companies to petition the Commerce Department directlyto impose countervailing tariffs on countries that manipulate their currencies. This would be a big change, circumventing the Treasury Department and its official process, and potentially create a turf war between Commerce and Treasury. (And lest you think there wouldn’t be a turf war:“Currency issues are historically, going back to the Second World War, a real core Treasury prerogative which it defends to the death,” said Gary Hufbauer, a former Treasury official and trade expert at the Peterson Institute for International Economics.)

Any escalation might lead to a trade war—or it might not—but it would certainly hurt diplomatic relations with a country that the U.S. must work with on a wide array of issues, from deterring North Korea’s aggressions to stopping intellectual property theft. Balancing those goals has always been easier for presidential candidates than presidents, and history has shown that when they take office, new presidents typically back off their attacks on Beijing. But Trump has surrounded himself with sharp critics of China—Peter Navarro, the head of the newly-created National Trade Council, made an entire movie called“Death by China.” If any candidate were to follow through on their promises to target Chinese currency policies, it would be Trump.

Ironically, he’s also the first president in many years to enter office when Chinese currency manipulation isn’t currently a drag on the U.S. economy. So he’d be using a tool that’s relatively toothless as a financial weapon, but could have a lot of meaning politically, on both sides. As Hufbauer put it: “Sometimes, names hurt.”